Bailout is already a flawed deal

More oversight desirableCOMMENTARY

Published 5:00 am, Saturday, October 25, 2008

This is no way to run a bailout.

The Treasury Department recently awarded the first contract for administering the $700 billion that taxpayers have ponied up to fix the busted financial system. How much, you may wonder, are we paying for these services?

Good question.

To paraphrase a million corporate news releases, terms of the deal were not disclosed.

In fact, they were blacked out in a copy of the contract released by the Treasury just one day after Neel Kashkari, the official charged with setting up the bailout mechanism, told reporters that “we are committed to transparency and oversight in all aspects of the program.”

Goldman’s absence

The Treasury awarded the administration contract to Bank of New York Mellon, which was a bit of a relief. At least it wasn’t Goldman Sachs, whose alumni now control the Treasury. But BONY has its own potential conflicts, having just ingested about $2 billion from the government in exchange for preferred stock as part of the same bailout plan it will administer.

Of course, all the major banks are getting something in the bailout, so finding an administrator that’s not on the dole is probably impossible.

But as taxpayers and now BONY shareholders, we’re entitled to see how much the bank is getting paid. Treasury officials have said they’ll release the terms of the monthly fees once the contract has been nailed down, which will probably take a few weeks.

Lacking transparency

That, of course, misses the point.

This isn’t a typical banking agreement. This is a government contract. That means the bidding process should have been open, or to use Kashkari’s term, transparent in all aspects. We should have known going in what BONY and its rivals bidders were offering.

In addition to the BONY deal, the Treasury Department last week hired two accounting firms: Ernst & Young to provide general accounting and PricewaterhouseCoopers for internal controls.

Once again, the Treasury Department blacked out the terms of the three-year agreement, according to copies posted by Bailoutsleuth.com, a Web site backed by Dallas billionaire Mark Cuban that’s monitoring the details of the government program. Also redacted are the names of the PricewaterhouseCoopers employees assigned to the contract.

The E&Y agreement simply says that parts were redacted but doesn’t make it clear what was hidden.According to a copy of that contract.

Both firms, by the way, have potential conflicts in this deal, too. Both have worked for Lehman Bros., the bankrupt investment bank — E&Y was its auditor — as well as insurer AIG, the object of an earlier government bailout.

In other words, everyone involved in this process deserves oversight and scrutiny.

Yet the contracts are being handled as if no one involved in the process understands the rules have changed.

Just as AIG had to learn the hard way that taxpayers aren’t going to foot the bill for spa treatments and hunting trips, and just as Wall Street is learning that our capital comes with a demand that bonuses be cut and executive salaries curtailed, so too, must the bailout advisers — and for that matter the Treasury itself — understand that we, the owners and taxpayers, have a different set of standards.

If we’re going to clean up Wall Street’s mess, the process has to be open.

Perhaps we shouldn’t be surprised that the Bush administration, with its yen for secrecy and its general disdain for responsive government, would conduct the bailout in the shadows.

But it’s a bad start to a process rife with the potential for massive conflicts and corruption.

Kashkari attempted to assuage those concerns with reassuring words about transparency.